LPC: Banks reap rewards from record U.S. syndicated lending

NEW YORK (Reuters) - Bank earnings from underwriting US syndicated loans leaped to an all-time high in 2017, propelled by an onslaught of deals locking in low interest rates as well as a late-year burst of announced mergers anticipating the biggest US tax system overhaul in more than 30 years.

The unprecedented push by highly indebted companies to refinance existing loans was the biggest driving force for the US$2.5trn of US syndicated loans issued last year. Total lending spiked 26% from the US$1.99trn in 2016 and 17% from the prior record of US$2.1trn reached in 2013, according to Thomson Reuters LPC.

Fees earned on arranging loans to both low- and top-rated companies added to income from M&A advisory, and equity and bond underwriting fees to also set a record for the total US investment banking fee pool last year, jumping 20% to US$47.4bn, Freeman Consulting Services estimated based on Thomson Reuters data.

Banks earned nearly US$11bn in 2017 from underwriting leveraged loans, a 49% spike from the prior year, while income from lending to top-quality companies increased 21% to US$1.4bn, Freeman Consulting said.

Leveraged loan fees were the highest ever, topping the prior peak of US$9.3bn in 2014. Fees from underwriting investment-grade loans reached the second-highest on record, following US$1.8bn in 2011.

“There were really no macro shocks at all,” Jeff Nassof, a director at Freeman Consulting, said of the wide open lending markets. “Oil was stable, Europe and China were stable, and it was risk-on throughout all of 2017.”

FEES FLOWING INTO 2018

Even if leveraged loan refinancing fades from last year’s torrid pace as interest rates rise, a steady pace of M&A is expected in 2018.

A corporate tax rate cut to 21% from 35% under the new US tax system, a steadily expanding economy, and the potential repeal or relaxation of US leveraged lending guidelines, will spur more company takeovers and leveraged buyouts, bankers and attorneys have said.

It remains to be seen if cheaper access to overseas cash stockpiles, part of US tax reform, will put a damper on lending to back these deals.

Prominent investment-grade loans included the US$49bn bridge loan late last year for US drugstore operator CVS Health Corp’s US$69bn buy of health insurer Aetna Inc, the second-largest acquisition financing ever. Also noteworthy was the US$13.7bn bridge loan for Amazon.com’s purchase of upscale grocer Whole Foods Market, a deal that is shaking up the food supply chain business and promising more tie-ups altering delivery models in various sectors.

Bank income generated from the growing crop of M&A deals announced in the fourth quarter will pick up in the first half of this year, when some large bridge loans are expected to be replaced with permanent bond financing.

“Recently M&A has started to pick back up, and a lot of deals announced recently won’t hit fee pools until next year,” when the permanent financing closes, said Nassof.

CVS, for example, late in December entered into a US$5bn term loan agreement, reducing the size of the bridge, while leaving the vast majority of long-term debt financing and related lender fee income as this year’s business.

The robust demand compelling fast-paced issuance of syndicated loans and high-yield bonds should persist at least into the first part of this year, assuring a steady fee source for banks, according to investors, bankers and attorneys.

“There’s a massive amount of dry powder in the US,” said one M&A attorney.